Jan 16 - Standard & Poor's Ratings Services today said its ratings on Bank
of New York Mellon Corp. (BK; A+/Negative/A-1) are not affected by the
company's fair fourth-quarter earnings, which reflected a modest overall decline
in revenue and rise in expenses relative to the third quarter. Results broadly
met our expectations in the context of the difficult market conditions, namely
low reinvestment yields and subdued market activity. We anticipate that the
company will continue to face net interest margin (NIM) compression from very
low rates in the coming quarters, but overall fee revenue generation from its
diversified investment servicing and asset management businesses should remain
relatively stable and within our expectations for the ratings.
The company reported net income available to shareholders of $622 million,
versus $720 million in the third quarter. Despite the decline, operating
earnings were satisfactory, in our view, as the company posted an approximate
27% pretax operating margin, down slightly from the third quarter. BK had
negative operating leverage, as total revenue dipped 1%, while operating
expenses rose 4% from the previous quarter. Still, we anticipate that BK will
continue to focus on expense controls in 2013. In addition, a low tax rate, a
$61 million loan loss provision credit, and $50 million in realized securities
gains boosted results in the fourth quarter.
Investment services fees declined 5% from the third quarter, mainly because of
a seasonal decrease in depositary receipt revenue. Positively, the largest
component of fee income--asset servicing fees--remained solid, which net new
business partly aided. Securities lending and foreign exchange trading revenue
decreased during the quarter, reflecting lower market activity. Investment
management fees (including performance fees) rose 9% from the previous
quarter, and that business maintained good inflows of long-term assets under
management (AUM). Overall, assets under custody and administration were about
unchanged, supported by net new business, while AUM increased 2% from the
third quarter to $1.4 trillion, reflecting both higher market valuations and
net new business.
Despite a rise in earning assets, BK's net interest revenue declined 3% during
the quarter, as its NIM narrowed a substantial 11 basis point to a very thin
1.09%. The company estimated that 6 basis points of the NIM decline stemmed
from an inflow of customer deposits that the company placed into low-yielding
Federal Reserve Bank deposits. We expect the NIM to remain narrow in the
coming quarters because of lower reinvestment rates on the company's
securities, although the company may seek to shift to slightly
higher-yielding, albeit high-quality, assets.
As we expected, BK's capital ratios rose during the fourth quarter, reflecting
some earnings retention after the bank deployed $417 million of capital
(including $170 million of stock buybacks). This total payout represents 67%
of net income. We anticipate the company will continue to buy back stock at a
similar pace in the next quarter under its $1.16 billion program. However, our
rating reflects our assumption that BK's total payout will generally not
exceed 65% over the next two years. BK estimated that its Basel III Tier I
common equity ratio (under the Federal Reserve's new proposed rules) rose 50
basis points in the quarter to 9.8% because of lower risk-adjusted assets and
The negative rating outlook on BK reflects our negative outlook on the U.S.
sovereign rating because of the one notch of uplift we incorporate into our
ratings on BK, given our expectation of potential extraordinary U.S.
government support. Otherwise, we continue to view BK's fundamental trends as
stable. We expect that BK's overall financial performance will remain
satisfactory, although earnings power should remain subdued because of low
interest rates. The rating reflects our expectation that BK will increase its
risk-adjusted capital ratio, based on our measurement, to more than 7.0% over
the next few years through earnings generation, the run-off of its
speculative-grade MBS portfolio, and conservative capital management.